Head and shoulders top forming on the Dow?

Focus: Oil services, SLB, NOV, OIH, FLR, CMC, ENS, SRS, SPN, SNG

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CINCINNATI (MarketWatch) -- With the recent downdraft, the Dow industrials have closed in on treacherous technical territory.

Namely, the blue-chip benchmark finished Monday about 100 points above its 2008 closing low, and a break under that level could pave the way for significant incremental losses.

Along with the Dow's downturn, the other major benchmarks - the S&P 500 and the Nasdaq - are also precariously positioned as detailed below.

The S&P 500's hourly chart above details the past three weeks.

For the time being, this near-term view remains straightforward.

Namely, the current downturn originated with a failure at the 1,406 resistance two weeks ago.

After breaking down, the S&P stalled again near the 1,370 resistance before extending its losses.

From current levels, overhead now holds at its newly established breakdown point of 1,330.

Meanwhile, the Dow industrials' near-term view also remains bearish.

With recent losses, the Dow has extended under the 12,000 mark, closing Monday at 11,842.

From current levels, first resistance holds in the 11,980-to-12,000 area, followed by additional overhead around 12,080.

And the Nasdaq also looks technically horrible.

As the chart illustrates, the index stalled twice last week near its 2,470 breakdown point.

Upon failing to clear that area, it sold off sharply, closing Monday at 2,385, marking a two-month low.

Widening the view to six months adds perspective to the Nasdaq's backdrop.

On this wider view, the index looks increasingly vulnerable.

In mid-June, the Nasdaq broke decisively under its 50-day moving average, before staging a corrective bounce to the 2,480 area.

Yet the rally failed to take hold, leading to another sharp downturn last week that concluded at a two-month trough.

Monday's low marked a "lower low" for the index, setting the stage for a potential near-term downtrend.

Meanwhile, the Dow industrials' wider view is even less constructive.

As the chart illustrates, it's broken sharply under the 12,000 mark, notching two straight closes at 11,842.

This places the Dow back within "sky is falling" territory, and despite that status, market sentiment -- as measured by the Volatility Index -- remains unusually complacent.

From current levels, notable support holds at the 2008 closing low of 11,740, just 102 points under Monday's close.

And not surprisingly, the S&P 500's backdrop has further deteriorated over the past week.

As the chart illustrates, it's edged under the 1,326 support, closing Monday at 1,318.

Like the Dow, immediate support is limited from current levels, setting the stage for a potential retest of the January and March lows.

The bigger picture

The U.S. markets' downside slide has accelerated over the past week.

Specifically, from last Monday's close to yesterday's close -- a one-week span -- each benchmark has performed as follows:

The Dow industrials have plunged 427 points, or 3.5%.

The Nasdaq has dropped 89 points, or 3.6%.

The S&P 500 has lost 42 points, or 3.1%.

And in the process, each benchmark has notched multi-month lows.

Yet despite recent losses, the U.S. markets are on increasingly shaky technical footing as detailed below.

This next chart above is a weekly view of the Dow industrials in which each bar represents each week going back five years.

Very simply, the Dow's five-year chart isn't looking good.

That's because, with its recent downdraft, the prospect of a bearish head-and-shoulders top has come into play.

The head-and-shoulders is among the more reliable reversal patterns, and it would be resolved with a violation of its neckline, in the 11,750 area.

Notably, the Dow's 2008 closing low came in at 11,740, closely matching that 11,750 target.

That means at Monday's close of 11,842, the Dow stood about 100 points from treacherous technical territory.

A close under 11,740 would not only mark its worst finish this year, but would also coincide with a significant technical failure.

So looking ahead, the next several sessions could dictate whether this longer-term bearish pattern takes hold.

But either way, the U.S. markets likely face another extended basing period before reasserting a firmly bullish bias.

Returning to the more immediate backdrop, a close atop each benchmark's breakdown point -- at Dow 12,340, S&P 1,370 and Nasdaq 2,470 -- would mark a first step toward making technical repairs.

Yet until the S&P breaks back atop the 1,426 level -- the May closing high -- the U.S. markets' technical path of least resistance will remain lower, and despite recent losses, the downside from current levels could still be significant.

Tuesday's watch list

The charts below highlight names well positioned technically. These are intended as radar screen names -- sectors or stocks positioned to move near term. For the original comments on the stocks below, check out The Technical Indicator Library.

Index

Symbol

Mon Close

Support

Resistance

Oil Services Index

OSX

359.6

350.0

New High

Last profiled May 16, the oil services sector continues to press higher.

As the chart illustrates, the group staged a steep rally from the March lows, culminating at record territory in mid-May.

By comparison, the subsequent pullback was flat, with the index establishing a narrow five-week trading range.

This week's lift to another all-time high positions the group to build on the March-through-May spike.

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